A few days ago, I posted a video where fellow Venture Hacker Naval Ravikant answers the age-old question:

What do you look for in a startup?

I liked his answer and transcribed/paraphrased it below:

(Video: Interview with Naval Ravikant.)

“There’s no silver bullet or magic answer but I actually do have a set of criteria I’ve come up with based on my own startups, after looking back on what worked.

“I look for two things that are paramount above all:

  1. Great team. It’s obvious. It’s a tautology. Everybody says it. You have to be working with some of the best people in the industry you’re in.
  2. Huge market. Niche markets just don’t work because the first idea never works. You always have to change the idea, so you need room to maneuver in a big market.

“There are three more factors that I look at. Not all three of them are required but I prefer a company to have at least two of them:

  1. Difficult technology that is compounding over time.
  2. A proprietary distribution channel. A clever viral marketing, or SEO, or partnership, or whatever strategy that gives them a leg up over competitors.
  3. A direct monetization model. Something more than throwing up 10 cent banner ad CPMs.

“There’s a small number of companies that are very good and very qualified and they get an embarrassingly large number of offers. And there’s a large number of companies that miss on one or two of these dimensions and they pound the fund-raising pavement and don’t get anything.

“This makes sense when you think about it because this is a hit-driven business: a small number of companies account for all the returns. So when people recognize what they think is a winning company, they will pay almost anything and they will do almost anything to invest in that company. And when they look at what they think is a non-winning company, they just say “bye”.

“It’s very similar to Hollywood where there are a few blockbusters and a lot of indie films made. Everyone’s got a camera but odds are you have an indie film. So go back to these five criteria and think about your blockbuster.”

My criteria are a little different. Yes, you need a great team in a big market (preferably, the team has years of experience with their customer).

The only other thing I look for is an amazing product. What makes a product amazing? You know it when you see it. The founders must be chasing a big vision with a beautiful product that is going to make a dent in the universe.

A great product automatically satisifies the technology, distribution, and monetization criteria. Great products are always hard to build. Grafting distribution onto something that isn’t great is a band-aid and a waste of time. It might work, but who wants to spend their lives doing it? Finally, a great product in a big market will either make a lot of money or shrink the market.

Knowing these criteria is one thing. Applying them effectively is another; I hope to learn how someday. It takes practice, diversification, and an aesthetic sensibility.

Topics Investment Criteria

15 comments · Show

  • chrisco

    You’ve just descried the venture capitalist’s wet dream.

    Everybody knows that startup when they see it, the herd knows it, the herd is chasing it, little skill is required to play this game, which is all about momentum (nothing wrong with it, but takes little skill).

    The skill (and value) is being able to pick a diamond out of the ruff.

    Cheers,
    Chris

    PS: VentureHacks is great, guys, keep up the good work!

  • Kartik Agaram

    Naval,

    How complete are these criteria? How good are VCs at measuring them?

    Restated: When a VC sees a hit that he wasn’t in on, what is he more likely to think?

    a) Drat, how did I miss the potential?

    b) Drat, I knew I should have networked harder to get in on that deal.

  • Naval

    These are my criteria – other investors will have different ones. They’re all fuzzy, by definition, which is what makes this one of the last apprenticeship / experience-based businesses. The one commonality that everyone will agree on is “great team” but the definition of that is different for different investors.

    Usually, if a VC misses a great one, they’ve rationalized themselves into saying that they didn’t want to do it anyway – that’s human nature. There are some notable exceptions, like Bessemer’s anti-portfolio.

  • BA410: Start Your Business

    What Do Investors Want in a Startup?…

    What do investors want? A common topic for blogs, entrepreneurs, and investors. So here’s another view on it, from somebody who knows:

    Naval Ravikant, the speaker, has been through the ringer a few times, on both sides of the investment table. …

  • chrisco

    Good quote from “The ‘Outside the Box’ Box” blog from last year: http://www.overcomingbias.com/2007/10/outside-the-box.html

    “Many in Silicon Valley have observed that the vast majority of venture capitalists at any given time are all chasing the same Revolutionary Innovation, and it’s the Revolutionary Innovation that IPO’d six months ago. This is an especially crushing observation in venture capital, because there’s a direct economic motive to not follow the herd – either someone else is also developing the product, or someone else is bidding too much for the startup. Steve Jurvetson once told me that at Draper Fisher Jurvetson, only two partners need to agree in order to fund any startup up to $1.5 million. And if all the partners agree that something sounds like a good idea, they won’t do it. If only grant committees were this sane.”

  • Ryan

    Great Article and great site, Naval I just cliked your name and read up on you – what you have done is truely awesome. My team is looking for some additional advisors as we approach funding – how do I approach you on that type of thing?

    Thanks,

    Ryan

  • Up and Running

    What Do Investors Want in a Startup?…

    What do investors want? A common topic for blogs, entrepreneurs, and investors. So here’s another view on it, from somebody who knows:

    Naval Ravikant, the speaker, has been through the ringer a few times, on both sides of the investment table. I…

  • Mark MacLeod

    This is definitely the wish list. The technology one is not a factor in many of today’s web startups where design and user experience seem to be replacing core tech as the basis for an advantage.

  • BA410.com » Blog Archive » What Do Investors Want in a Startup?

    [...] of what he says here is pretty standard. And if you’re interested, his fellow blogger transcribed this interview on venture hacks. Some highlights: “I look for two things that are paramount above [...]

  • What Do Investors Want in a Startup?

    [...] of what he says here is pretty standard. And if you’re interested, his fellow blogger transcribed this interview on venture hacks. Some highlights: “I look for two things that are paramount above [...]

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  • Anonymous

    Both my start ups have a monetization model that doesn’t include advertisements. I do need a CTO though. I’ve been just using a part time developer. That’s what’s been holding me back. I need to iterate quicker.

    In regards to a unique distribution channel, since my start up gets advertisers connected to bloggers, all bloggers are required to put up a link on their blog posts going to my start up’s web page about FTC regulations. This should help build my start up’s page rank and rankings.

  • Adrian Meli

    I liked these investment criteria a great deal and specifically liked the comment around not focusing on a niche market as your idea will likely morph. It will be interesting to see how many people trying to raise vc money change their models over time to fit with the various vc investor criteria given that lots of smart vc investors are online with blogs and talk a great deal about what they are looking for. In other words, I wonder if business plans will become better as a lot of smart vc bloggers offer up their advice publicly on a daily basis… – Adrian Meli